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Inflation Near Flat in May

June 17, 2009 (Prices Byte)

Inflation Near Flat in May

By Dean Baker

June 17, 2009

Real wages are now falling at a modest pace.

Both the overall and core CPI rose by just 0.1 percent in May. Over the last three months, the overall CPI has fallen at a 0.2 percent annual rate, while the core CPI has risen at a 2.3 percent rate. Over the last year, the overall CPI has dropped by 1.3 percent while the core rate of inflation has been 1.8 percent. The most recent price reports indicate that inflation is stabilizing for the moment at a level near zero.

Upward pressure on prices in the CPI are coming from the usual sources. Education costs increased by 0.5 percent in May and have increased at a 5.9 percent annual rate over the last quarter. Health care costs increased at a 0.3 percent rate last month and have increased at a 3.5 percent rate over the last quarter. Prices in both sectors are likely to rise over the next year partly in response to reduced government support. Universities and health care providers will be forced to raise prices for students and patients in order to make up for lost aid from hard-pressed state and local governments.

Shelter costs, which account for more than 40 percent of the core index, continue to be held down by the glut of housing and hotel rooms. Both rent proper and owner’s equivalent rent increased by just 0.1 percent in May. They have risen at 1.9 percent and 2.1 percent annual rates over the last quarter, respectively. This rate of increase is likely to slow further in the months ahead as there is no chance the excess supply of housing will be reduced substantially for several years in the future.

Among the anomalies in May were a 0.5 percent jump in new and used car prices and a 0.3 percent decline in tobacco prices. Both movements are offsetting sharp moves in the opposite direction in prior months. New car prices had fallen sharply at the end of 2008 as dealers cut prices to move inventory. In the last quarter they have risen at a 3.7 percent annual rate, but they are still up by just 0.4 percent over the last year. Car prices may continue to rise, but at a very modest pace given the huge excess capacity in the sector.

The drop in tobacco prices follows a rise of 11.0 percent in March and 9.3 percent in April. Clearly this is a measurement issue. Tax increases drove the rise in tobacco prices. There will likely be further increases in future  months as hard-pressed governments continue to look to tobacco as a source of revenue.

Prices at earlier stages of production also appear to be stabilizing at very low rates of inflation. Evidence of deflation is dissipating as prices are now rising for oil and many other commodities. The overall finished goods index rose by 0.2 percent in May after rising 0.3 percent in April. However, this followed a 1.2 percent drop in March. The index is still down by 5.0 percent from its year ago level. The core index fell by 0.1 percent after rising the same amount in April. It is unchanged from its level three months ago, although the core consumer goods index increased at a 1.1 percent rate over this period.

The intermediate and crude goods index rose 0.3 percent and 3.6 percent, respectively, both driven in part by higher energy prices. The core intermediate goods index fell by 0.2 percent, while the core crude goods index rose by 6.7 percent.

The picture in this month’s price reports is mixed. There seems little concern at present about the deflationary spiral that had worried many analysts last fall. At the same time, the current data provides little basis for fears of inflation, although as the dollar falls (because of the trade deficit) there will be upward pressure on commodity prices and imports more generally. The bad part of the story is that with nominal wages virtually flat, real wages are likely to be falling in an environment of even modest inflation.

Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, DC. CEPR's Prices Byte is published each month upon release of the Bureau of Labor Statistics' reports on the consumer price and the producer price indexes. For more information or to subscribe by email, contact CEPR at 202-293-5380 ext. 102 or email warner@cepr.net.

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